skip tocontent

annual review 1 April 2002 to 31 March 2003 - overview of complaint trends

mortgage endowment complaints

mortgage endowment complaints = 36%

other investment-related complaints = 64%

mortgage endowment complaints chart

Over the year, disputes involving mortgage endowment policies represented the largest number of complaints we received about a single issue or product - 22% of all new cases and 36% of investment-related complaints.

The delay by insurers in issuing their second round of ‘re-projection letters’ - that tell customers whether their policies are on course to repay their mortgages - meant that the increase we had been expecting in mortgage endowment complaints started later in the year than we had forecast. So for the first year since the Financial Ombudsman Service was formed, we saw an overall annual decline in the number of mortgage endowment complaints.

However, in the last quarter of the year - from Christmas 2002 - the volume of complaints about mortgage endowments started to increase significantly, with the number of new cases rising to 800 a week. This appears to reflect a similarly dramatic increase in the number of mortgage endowment complaints that firms themselves started to receive from late 2002.

The general decline in stock market performance has reduced the expected maturity values of policies, and more investors are now facing a shortfall than when the first set of re-projection letters were issued. We expect a significant increase in mortgage endowment complaints next year.

As firms should now have procedures in place enabling them to consider complaints and to offer redress in accordance with the regulatory guidance, we encourage consumers with potential complaints to await their firm’s response before asking the ombudsman to intervene. Where cases can be resolved by firms themselves, this benefits consumers - allowing them to switch to an equivalent capital repayment mortgage at the earliest possible opportunity.

Early in 2003, the FSA amended the rules so that consumers can have a slightly longer period of time in which to bring a complaint about a mortgage endowment policy to us. Before this period of time expires, consumers will have been put ‘on notice’ that they should consider their position - and they should have received at least one further reminder, as well as a factsheet from the regulator, telling them that it is time to decide what to do.

personal pension complaints

personal pension complaints = 19%

other investment-related complaints = 81%

personal pension complaints

The FSA’s Pension Review was targeted for completion by 30 June 2002 - but several thousand reviews had still to be carried out by that date. As expected, the end of the review led to increased levels of complaint. During the year, we received 7,233 complaints about personal pensions - an increase of 23% on the previous year (during which there had already been a 75% annual increase).

The major issue complained about continues to involve advice given to policyholders to leave an occupational scheme, or not to join one, and to invest instead in a personal pension policy. Falling stock markets have reduced the value of pension funds and led to lower annuity rates. So as consumers approach retirement, their concerns may increase as they learn that they might not get the pension income they had anticipated. We cannot consider complaints that are purely about disappointing investment performance. But we may be able to look at cases where consumers are unhappy with the advice they received.


'splits' complaints = 6%

other investment-related complaints = 94%

splits chart

During the year, we received 2,233 new complaints about split capital investment trusts and zero dividend preference shares - ‘splits’ and ‘zeros’. We had received only a few complaints involving ‘splits’ before this year - and they reached their peak during the summer of 2002. Early in 2002 we began work with the FSA on what was clearly developing as a major new area of complaint.

We have received complaints about firms who provide these investments and about firms that have sold them. Because many of the complaints fall into similar categories, we are considering them by looking at groups of complaints with similar features. This will enable us to examine ‘lead’ cases for each category of complaint, with a view to applying the outcome - once established - to other complaints in the same category. This approach should help us to complete our consideration of all ‘splits’-related complaints as quickly as possible.

We have come to preliminary findings on some of these ‘lead’ cases and have sent our initial views to the parties in question. We are now in further discussion with the parties involved. As part of the process, we must, of course, always give both sides to a dispute the opportunity to raise - and respond to - new comments and arguments, before we reach the final outcome.

Meanwhile we also continue to make decisions on cases that do not directly involve ‘lead’ case issues - and which are unlikely to set precedents or have wider implications for other ‘splits’ complaints. We decide these complaints on the basis of the individual facts and merits of each case.

We are keeping in regular touch with all investors with ‘splits’ complaints, even where we have not yet reached the stage of being able to write to them individually about their case.

In January 2003 we provided the Treasury Select Committee with information about our handling of these complaints. This was followed in early April 2003 with a joint statement to the committee by the FSA and the Financial Ombudsman Service, setting out how we are liaising closely on ‘splits’-related work.

complaints about mortgage loans (including dual variable- rates)

other banking-related complaints = 37.5%

complaints about mortgage loans = 62.5%

complaints about mortgage loans - chart

During the year 62.5% of the banking-related complaints we received were complaints about mortgage loans - of which 70% involved dual variable-rate mortgages. Some mortgage lenders moved from having a single variable mortgage interest rate to having two. Many borrowers who had taken out their mortgages before the change challenged their lender’s contention that they were linked to the higher rate, rather than to the lower one.

In three ‘lead’ cases, involving lenders A, B and C, we decided that the particular borrowers’ mortgage contracts entitled them to be linked to the lower of the rates. Lender A decided to compensate its borrowers who were in a similar position, whether or not they had complained. Lenders B and C decided to compensate their borrowers who were in a similar position - but only if they had complained.

During the year, we received many additional cases about lender C. Some were from borrowers who challenged the amount of compensation they had received. Others were from borrowers who had been refused compensation, because their circumstances differed materially from the lead case. To cover the differing circumstances, we decided a further five lead cases. These went in favour of lender C.

We also received significant numbers of such cases about lenders D and E. The lead case about lender D went in favour of the customer. There were two lead cases about lender E, covering different circumstances. One went in favour of the customer and one in favour of the lender. Lenders D and E decided to compensate their borrowers who were in a similar position to the winners in the lead cases, but only if they had complained.

We resolved a large number of ‘follow-on’ cases about lenders C, D and E - together with a handful of cases about other lenders. Only a few cases remain - where there are special issues to resolve. There is more information about some of the lead cases and their outcomes on our website. With the agreement of the lenders concerned, this includes copies of the full decisions (though we have removed the borrowers’ names to preserve their confidentiality).

The remaining third of complaints about mortgage loans that we received during the year covered a variety of issues. As in previous years, the most common issue was early repayment charges on fixed-rate and discount-rate mortgages. Other issues included ‘under-funding’ - where the payment that the lender told the borrower to make was set too low - and interest-only mortgages where an endowment or pension policy intended to repay the capital was never set up or had lapsed.

complaints about about other loans

complaints about other loans = 6%

other banking-related complaints = 94%

other loans pie chart

With interest rates remaining low, we continue to receive a significant number of complaints about fixed-rate business loans. Typically, the lender borrows the funds in the money market and has to pay compensation if it breaks the deal and interest rates have fallen. So the loan agreement requires the borrower to pay an equivalent early repayment charge to the lender. If interest rates do fall, the borrower may want to get out of the fixed rate - and may dispute the early repayment charge.

Because the charge depends on the level of market interest rates, the loan agreement cannot say how much it will be. Instead, it says how it will be worked out. This has the advantage for the borrower that the charge is linked to the cost, if any, to the lender. It has the disadvantage that the explanation will be complex and the amount unknown. We have to consider whether the charge, as an ‘onerous term’, was sufficiently brought to the borrower’s attention. In some cases, we decide that it was not.

Lenders should take into account that many businesses are small, with little financial expertise and no understanding of the money market. The best agreements draw attention to the early repayment charge, explain its operation clearly, warn that the charge may be substantial and advise borrowers to get legal advice first. The worst agreements hide the charge away, contain explanations that are opaque (or even misleading), have no warning and say nothing about borrowers getting their own
legal advice.

credit cards complaints

credit card complaints = 6%

other banking-related complaints = 94%

credit card complaints - chart

A significant number of complaints about credit cards relate to section 75 of the Consumer Credit Act 1974 - under which, in certain circumstances, the credit card issuer is equally liable for any misrepresentation or breach of contract by the supplier of the goods/services paid for with the credit card. So, many of these cases turn on what was done by the supplier, rather than the credit card issuer.

Particular difficulties arise with transactions abroad - often time-share purchases. There is a long-standing debate about whether section 75 applies to transactions abroad. Successive governments have not clarified the legislation. And courts have not yet decided the issue either - although court proceedings, involving the Office of Fair Trading and two credit card issuers, are now in prospect.

Meanwhile most credit card issuers will refund the amount paid by credit card (though, in some cases, only after considerable pressure). We require the other issuers to follow this as good industry practice. But most credit card issuers refuse to cover any loss that exceeds the amount paid by credit card (for example, where the price was paid partly by credit card and partly by cheque). During the year, three credit card issuers gave the Office of Fair Trading undertakings that they would compensate these losses in future.

complaints about savings and deposit accounts (including TESSAs)

complaints about savings and deposit accounts = 5%

other banking-related complaints = 95%

complaints about savings chart

Almost all the complaints that we received during the year in relation to savings/deposit accounts were about the interest rate paid - and were usually complaints that the rate had been downgraded or was otherwise unfair. This was a key issue in the review of the Banking Code, which took place during the year. The Code is written by the industry - but, for the first time, an independent reviewer was brought in to consult and make recommendations. The process worked well and the new Code, effective from 1 March 2003, contains significant improvements.

In particular, the new Banking Code contains provisions about accounts that are downgraded by 0.5% or more (whether in one step or a series of steps) by comparison with the Bank of England base rate. Customers will now be entitled to personal notification of such a change and an opportunity to move their money, with any notice periods and penalties being waived. Unfortunately, a few firms side-stepped this provision, by reducing their rates shortly before it came into effect - showing that not all the leopards in the financial jungle have changed their spots.

In previous years, we received many complaints that it was unfair for firms to pay lower rates of interest on their TESSAs (Tax Exempt Special Savings Accounts) than on their ISAs (Individual Savings Accounts). Broadly, we resolved these complaints according to whether the contractual terms of the ISA were less onerous (or not) than those of the TESSA - and whether the firm had reminded the customer of the right to transfer to another TESSA provider.

One firm that had ‘lost’ a case like this asked for the ombudsman’s decision to be referred to the High Court under the judicial review process. The firm said that the ombudsman’s decision was wrong in law and irrational - but that, if the decision was upheld, the firm would compensate even those of its TESSA customers who had not complained. The case was heard in September 2002.

The High Court’s decision gives useful guidance on the interpretation and application of industry codes of practice. Even if people might reasonably come to different conclusions about a code’s meaning, it can have only one true meaning - to be decided, if necessary, by the Court. But the ombudsman is not restricted by the code in deciding what is fair in the circumstances of a particular case.

The High Court upheld the ombudsman’s decision about the TESSA. It said that the ombudsman could not ‘stretch’ the principles of the Banking Code to cover a situation that was not contemplated when the Banking Code was written. But the Court concluded that the ombudsman’s decision was rational and reasonable on grounds of fairness.

motor insurance complaints

motor insurance complaints = 24.5%

other general insurance complaints = 75.5%

motor insurance complaints

Motor insurance complaints increased by 47% last year. A significant cause of complaint was the ‘keys in cars’ exclusion. Many motor insurance policies now exclude thefts where the driver has left the car unlocked with the keys in the ignition (or on the seat). For many customers this comes as an unpleasant surprise. In some cases, the theft is more akin to hijacking. In other cases, the customer seems to have moved well away from the car - and is no longer able to keep it under observation or be in any position to deter a theft. We set out our general approach to these cases in ombudsman news (January and April 2001 issues), to help firms minimise the number of complaints. But in these cases much depends on the precise sequence of events and the overall circumstances of the loss.

The other major area of complaint about motor insurance policies relates to repairs. When the insurer decides to settle a claim by arranging for repairs (rather than by making a cash settlement), the insurer becomes responsible for the quality of those repairs. These arrangements are not always clear cut. For example, the insurer may have arranged for the car to be taken to a particular garage. On the other hand, the insurer may just have chosen a repairer from a number of quotations obtained by the customer. We try to assess whether the insurer has, in practice, had the main say in the repair arrangements. If this is the case, we can then become involved in difficult judgements about whether repairs are adequate.

complaints about building and contents insurance

complaints about building and contents insurance = 24%

other general insurance complaints = 75.5%

complaints about building and contents insurance chart

Complaints about building and contents insurance account for about a quarter of the disputes we deal with involving general insurance products. As with motor insurance complaints, many cases relate to the quality of repairs and raise similar issues.

Complaints involving fraud or alleged fraud also continue to be a significant feature of our caseload. In these cases, the insurer argues that it has sufficient evidence of fraud to turn down the claim. If this is true, we have no hesitation in upholding the insurer’s position. In some cases, however, the insurer has little more than its instinct to rely on - and has not been able to present any evidence that the claim is fraudulent. On some occasions, a policyholder - perhaps pressed by an insurer to provide evidence of ownership of goods - will provide documents that are forged. Clearly, this will affect our view about the credibility of the policyholder’s account of events. But if the evidence suggests that the policyholder did in fact own the disputed goods as described in their claim, we generally take the view that the fact that the documents were forged is not in itself sufficient to warrant declining the claim.

A major preoccupation for insurers and many householders has been the availability of flood damage cover for homes. The Association of British Insurers (ABI) has produced a statement setting out the circumstances in which an insurer will continue to provide cover. This provides important safeguards for customers, while plans for flood defences are being put into place. We have made it clear that we would consider complaints from any customer who considered an insurer had not complied with the ABI statement.

medical-related insurance complaints

medical-related insurance complaints = 16.5%

other general insurance complaints = 83.5%

medical related insurance complaints chart

Complaints relating to permanent health insurance, critical illness cover and private medical expenses insurance form a significant and sensitive part of our insurance caseload. Most disputes in these areas require careful consideration of medical evidence - for example, to assess whether a customer is permanently and totally disabled. During the year we set out how we assess such cases - especially where there is conflicting medical evidence. We noted that we were likely to give evidence from suitably qualified independent consultants greater weight than evidence from other sources, such as ‘functional capacity evaluation’ reports (see the January 2003 issue of ombudsman news for further details).

A significant number of the medical-related complaints we deal with continue to involve disputes about ‘non-disclosure’. If a customer has not disclosed an illness or treatment when applying for insurance, the insurer may be justified in rejecting a claim - should one arise. The insurance industry - through the ABI - has been working to improve the quality of application forms. This is helpful in ensuring that clear questions are asked. We have contributed to this work and pointed out the type of questions that, in our experience, cause particular problems - for example, where the firm expects specific details but does not make this clear.

Another issue that arises in medical-related complaints involving ‘non-disclosure’ is the requirement for the customer to disclose any medical conditions that occur after the customer has applied for insurance but before the policy actually starts. There can be a considerable period of time between applying for insurance and the policy coming into force - for example, where the insurer has to make further enquiries, or where the start date of the policy is linked to a mortgage that the customer is taking out. In our experience, customers are not always aware of the need to disclose changes in their circumstances during this period - and we have upheld some complaints where we have concluded that the insurer did not do enough to make this requirement clear.

In the case of medical expenses insurance, we continue to deal with complaints that focus on the distinction between acute and chronic conditions. With conditions like heart disease or cancer, an insurer may conclude that an illness that started as acute (for which cover is available) becomes chronic at some point - after earlier treatment(s) have been tried but were not successful. Chronic conditions are not covered under medical expenses policies and are typically defined by reference to terms such as “where treatment is not to cure the condition but to relieve symptoms”. So an insurer’s decision that a condition has become chronic not only means that cover is withdrawn at a time when the policyholder is particularly vulnerable - it also implies a prognosis that the patient and their medical advisers may not themselves l have reached. We have discussed with insurers how the wording of this provision - and the handling of these cases - can be improved, to minimise both distress for policyholders and the likelihood of complaints.

travel insurance complaints

travel insurance complaints = 11%

other general insurance complaints = 89%

travel insurance complaints chart

Travel insurance continues to represent a significant proportion of the general insurance complaints we deal with. Of particular significance is the handling of medical emergencies while abroad - especially in the USA and other parts of the world where health treatment is expensive. Extended hospital stays and treatment can give rise to bills amounting to tens of thousands of pounds. Six figure sums are not unheard of. If travellers need to make a claim, they will find they are not normally covered if their illness is excluded as a ‘pre-existing condition’ under the policy. Under this exclusion - which is common to almost all travel insurance (and many other health based policies) - cover is not provided where an illness arises from a condition that the traveller had previously (or was suffering from when they took out the insurance).

Our casework suggests that few travellers are made aware of the ‘pre-existing condition’ exclusion when they buy their policy (often as part of their holiday package). And fewer still recognise the potential implications of the exclusion. We often need to reach difficult conclusions about whether an illness can properly be described as having arisen from a previous condition. For example, does a history of high blood pressure mean that a traveller is not covered when they have a heart attack?

During the year, we drew attention to the importance of good record-keeping by travel insurers when customers contact a firm’s medical helpline to discuss their medical history prior to travel. Misunderstandings at this stage can lead to major problems for both parties. So it has been encouraging to note that, increasingly, firms are recording calls to their medical helplines and confirming in writing any important points - such as alterations to cover or illnesses that would not be covered (see the July 2002 issue of ombudsman news for further details).

Another difficult area is the application of conditions that exclude cover where claims arise from the use of alcohol. It is entirely understandable that insurers should wish to avoid meeting claims from travellers who have become so drunk that they are not in control of their actions or make themselves ill. However, some insurers apply this type of exclusion more widely, to cover any circumstance where drink is involved. We take the view that such a wide application of the policy is likely to be unreasonable.

other insurance disputes

Since 1 December 2001 - when the new ombudsman service rules came into force - we have been handling a small number of commercial insurance disputes. At present, the number of these disputes is low - as only events that took place since that date can be referred to us. Given our limited experience in this area, it is difficult to draw firm conclusions about the future nature or volume of these disputes. However, early indications suggest that most commercial insurance disputes are likely to relate to buildings or motor policies held by small businesses.

useful links